Soaring Remittances Raise New Issues

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Soaring Remittances Raise New Issues

June 1, 2003

Feature

By

Richard Black

The sending of remittances by migrants is an old topic in the study of migration, but one that recently has stirred renewed policy attention. As estimates of global remittances by migrants rise, to a level that is on par with global development assistance and foreign direct investment in the developing world, it is not surprising that the phenomenon is of interest to development policymakers. What, then, are the "new" issues that researchers should be concerned with, if the development potential of remittances is to be realized?

A useful starting point is to consider what is already known about remittance behaviour, as a basis on which new research might build. Beyond the obvious issue of measurement of the quantity of remittances – where much remains to be done – three key issues stand out. First, when and why do migrants choose to remit money, or remit greater sums? Second, how are these transfers made, and are there ways to make these transfers easier or more effective? And third, to what use are remittances put?

When and Why Do Migrants Remit?

There is now a substantial economic literature that considers the reasons why migrants send money home, and which seeks to model remittance behavior in order to predict when remittances will increase. Evidence has been produced to support differing theoretical explanations of remittance behavior, including "altruism," which suggests that remittances rise when the economic needs of families back home increase (Becker 1974), the notion of "exchange," which suggests that migrants are effectively paying back family and relatives for investments in the education or travel of the migrant (Cox 1987), and the idea of "co-insurance," where both migrant and family provide monetary and in-kind transfers to ensure the other against temporary "shocks" (Lucas and Stark 1991). More broadly, it is possible to say with some confidence that remittances are likely to be higher in situations where the migrant leaves broadly for economic rather than political or social reasons, where they have temporary rather than permanent resident status, where they are young, but married with family left behind at home, and that remittances will increase as emigrant wages increase – although at a certain point, further increases in wage levels do not seem to translate into higher remittances (Taylor 1999; de la Garza and Lowell 2002). However, these understandings do not necessarily provide clear policy signals, particularly for governments of sending countries who are likely to have relatively little influence over who migrates.

Mechanisms for Transfer

A second area of existing research and knowledge – and one which is currently developing quite fast – is in the analysis of the mechanisms through which migrants send money, and the institutional barriers to efficient transfer of remittances. For example, there has been interest in the relative performance of formal and informal channels, and interesting recent work that highlights the efficiency of channels such as "hundi" or "hawala" systems of money transfer that generally lie outside the formal and regulated banking and financial sector, and can cost half or less than formal banking and other channels in terms of commission, as well as having much greater reach to rural areas of origin of migrants in certain parts of the world (El Qorchi 2002; Ballard 2002).

At the same time, and particularly in the context of fears that such informal systems can also be a potential channel for money laundering and supply of funds to terrorist groups, there is considerable interest among policy makers in drawing more remittances into formal, regulated channels. The UK's Department for International Development has commissioned work on three pairs of countries that are sending and receiving countries for migrants, to explore the barriers to transfer through formal financial channels. Similar work by IADB has investigated transmission costs and regulation in this developing sector in Latin America (Suro et al. 2002).

Here, the policy implications are perhaps clearer: remittances are likely to increase if legislative barriers and fiscal costs of financial transfers can be reduced; the latter is likely to be facilitated by the introduction of more market players and modes of transmission, better provision of reliable information to migrants on the costs of transfer, and generally better and more credible supervision of the sector to ensure the transparency and reliability of transfers.

How Are Remittances Used?

The third area of "existing knowledge" concerns the use to which remittance flows are put by migrants' families and more generally in countries of origin. Here, a longstanding literature has suggested that remittances are too often put to "unproductive uses" – satisfying basic consumption needs, buying medicines, building a house for the migrant's retirement, or spending on "conspicuous consumption" in festivals and funerals as well as daily life – although such expenses can have a number of multiplier effects in the local economy (Russell and Teitelbaum 1992). Where remittances are invested in businesses, all too often these are seen as small-scale, at the margins of profitability, and concentrated in the retail and services sectors. Here, existing policy interest has focused on providing incentives for migrants to invest in "productive" activity, including special funds and instruments, investment breaks, loans, as well as training in entrepreneurship skills, and the promotion of trust, leadership, and transparency.

Challenges to Current Knowledge

However, despite this attention, there remain gaps in our understanding of how remittances are, or can be used, to promote development, especially given that existing policy incentives are not generally considered to have been very effective in channelling remittances towards development.

A first point to make is to challenge the notion that the use of remittances for private consumption necessarily conflicts with the promotion of more socially useful ends – for example, consumption stimulates demand, which may create markets and jobs, while if "development" is defined as the reduction of poverty, remittances may be very effective in putting cash directly into the hands of poor people, to lift them out of poverty. Nonetheless, a first challenge here is to analyze further the extent to which remittances do go directly to poor people, or alternatively act to enhance inequality by enriching the already better-off families of migrants. Attention also needs to be focused on understanding the wider multiplier effects of the use of remittances. For example, if migrants families use direct transfers to invest in health and education – as appears common in many situations – what are the knock-on effects of these investments on the wider provision of health and education services?

A second challenge relates to the fact that although early theoretical work in economics focused on analysis of data on domestic remittances from urban to rural areas, more recent research interest, and especially interest in the institutional mechanisms through which remittances are transferred, has focused overwhelmingly on international remittances. In this context, there remains a need to consider how to improve the operation and supervision of financial markets in source areas for internal migration, to ensure transparency and to reduce the costs of domestic transfers – even though these transfers do not involve the specific issues of currency exchange and international regulation of transfers.

Thirdly, although economic theories of remittance behavior as "co-insurance" between migrants and their families emphasize the changing amounts (and directions) of remittance flows over time, there remains a challenge to consider further how time away affects the propensity of migrants to remit money, and to seek to extend the time frame within which such remittances are maintained. Indeed, although there is a general understanding in the literature that remittances are likely to decline over time as migrants become more committed to their host country or region – three to five years away seems to be the peak period in which remittances are sent, and there is often a particular fall at the point at which a migrant achieves permanent resident status abroad – such a pattern is not inevitable and may be affected radically by macro-economic context, social and political change, and life events among migrants and their families. There is a need to understand these influences better – an understanding that may need to be context-specific.

A fourth issue is that although the micro and meso level have received considerable attention in research on what stimulates remittances, understanding of the significance of the macro context has arguably been left out of many analyses. There is considerable hope expressed in some accounts of remittances that they can lead to development, yet such expectations may be overly optimistic in the context of a poor macro-economic or political climate. Indeed, it may well be immoral or dishonest to encourage migrants to invest remittances in businesses or economic growth at a time when other investors would not do so because the returns are too uncertain. In this, there are perhaps some parallels between the study of remittances, and the study of aid, where one argument is that aid is most effective in promoting development in countries and regions that have better policy environments (Dollar 1999). If this parallel is of value, the immediate question that needs to be asked is what kind of changes are needed to tip the balance in poor countries or countries with uncertain economic or political environments, that would enable remittances to be put to effective use.

Conclusions

Building on this, the policy questions on how to make remittances work for development are about indirect policy measures that might be taken, rather than direct measures to promote and channel flows of remittances. Such an emphasis can also be seen as valuable in the context of the failure of several developing countries specifically to capture a share of remittance flows in the form of taxes in order to redirect these to "socially useful ends," the limited success of training, loans, and grants to migrants to invest their remittances, and the widespread perception of government corruption and the lack of trust of officialdom among many migrants.

The emphasis of development policy is now firmly on poverty alleviation (defined in terms of a dollar-a-day poverty line), and achievement of the Millennium Development Goals, which headline objectives such as universal primary education, the reduction of infant and child mortality, and universal access to safe drinking water and adequate sanitation. In this context, there is arguably a need for analysis of the relationship between remittances and development to be more firmly rooted in a concern with how remittances impact such critical indicators, both directly and indirectly.